Interview: Time for No-Fault Auto Insurance Reforms

In the mid-1960s, Professors Robert Keeton and Jeffrey O’Connell published Basic Protection for the Traffic Victim, a book that launched no-fault auto insurance into the public consciousness and formed the basis of the no-fault auto insurance laws that came to be passed in 25 states.

Time magazine’s 1966 story on the Keeton-O’Connell plan described it as an answer to a tort system clogging the courts with costly, complex cases that had “been steadily boosting the price of auto insurance, but the amount paid out in accident awards remains far less than the 50¢ of each dollar that the insurance companies collect in premiums.”

The Rand Corporation’s recent monograph, “The U.S. Experience with No-Fault Automobile Insurance,” shows no-fault auto insurance has been a mixed bag, however. Although the system does provide for quick and efficient compensation, policies in no-fault states cost more than those in tort states, and medical costs in no-fault are also higher than expected. That has led some states—most recently Colorado in 2003—to repeal their no-fault laws.

Professor O’Connell, who teaches at the University of Virginia’s law school, was a recent guest on The Heartland Institute’s Finance, Insurance and Real Estate podcast, where he discussed his view of how no-fault auto insurance has turned out and suggests reforms he’d like to see.

Heartland Institute: How did you and Professor Keeton first get interested in no-fault auto insurance?

Jeffrey O’Connell: We both taught what lawyers call tort law, which is the law of accidents. And we both were very concerned about how inefficient and dilatory, how long-delayed and how uncertain any payment from tort liability insurance was. And I wrote Robert Keeton a letter expressing my view on the matter, and he wrote back saying he shared the view, and would I be willing to work with him on a proposal to try to draft what later became known as no-fault insurance.

The idea of no-fault auto insurance had been kicking around for some forty years by then. What made it take hold in the mid-1960s?

Two things. The first is that rates were going up very high, and that was a matter of political concern. The rates were going up even higher than they’d been, at a gallop. Secondly, we actually drafted a bill, rather than just describe the matter narratively in a book or a law review article. And we hired an actuary to actually cost hypothetically what the reform would entail in terms of premiums.

And that made the idea much more pragmatic and much more implementable than the earlier work had been.

What sort of injuries did you think should be covered by no-fault?

We were very determined to eliminate what we thought was the great waste in smaller cases, where there had tended to be great overcompensation because the nuisance value of the claim was such that people were often getting 10 times for their actual medical expenses and wage loss for their so-called noneconomic loss; people talked about that as pain and suffering damages.

So we were very determined to ensure that we substituted for this bitter litigation in smaller cases a much more efficient and time-saving device of paying for medical expenses and wage loss as it accrued, as long as people hadn’t intentionally injured themselves.

One of the criticisms of how no-fault has turned out in the United States is that these difficult-to-pin-down pain and suffering losses have ended up being compensated, which has driven up the costs.

That has been a real problem in the way these laws were drafted. We tried to make sure that there was a fair trade such that in return for being paid your economic loss you had to give up your claims for noneconomic loss. But the trial lawyers and others who were determined to lessen the effect of no-fault passed statute after statute that guaranteed payment for economic loss but also made it much too readily available to pay for pain and suffering as well.

That’s been the great defect in the way the plan was administered in many states. The basic bargain has been violated.

Do you think that means it’s time to go back and redraft model laws?

I think that we should be redrafting. I think the laws should be drafted such that there is a real balance in what is provided in no-fault benefits and what is prevented in tort suits so you don’t get duplicating benefits.

And you can greatly reduce costs by saying, if health insurance is now available across the board to everybody, why do people buy auto insurance to cover health insurance as well? That doesn’t seem to me to make any sense.

So I would say that we should make it a matter of choice to say, look, I don’t need no-fault auto insurance. Health insurance is already there, and I’m paying for that. I’d rather pay less for auto insurance; I can’t agree to not pay for health insurance, as that’s compulsory.

If people have pretty good health insurance, there’s no reason they should be required to buy health insurance under their automobile policy as well. I think it makes good sense to give them a choice.